Consumer Discretionary

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Consumer Discretionary

• Reza Aditya
• Hakan Altan
• Adam Barrick
• Peter Manuselis

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Agenda

• Size and Composition
• Business Analysis
• Economic Analysis
• Financial Analysis
• Valuation Analysis
• Recommendation

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Size and Composition

• 10.54 of SP 500 consists of consumer
  discretionary sector
• Ranked 5 out of 10 as of 4/5/2007

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Sectors Industries

• Consumer Discretionary sector consists of
  thirty-two different industries
• Movies and Entertainment is the most largest
  industry, accounting for
• 17 of the sector

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Sectors Top 10 Companies
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Sectors 5-yr Returns

• 5.3 average annual 5 year return
• Ranked 6th for return/standard deviation

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Sectors 2006 YTD Returns

• Ranked 3rd in 2006 returns
• Ranked 8th in YTD returns

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Business Analysis

• Phase of Life Cycle
• Mature sales move in tandem with economic
  growth, positive correlation with disposable
  income
• Business Cycle
• Cyclical performance correlated to the economy
• External Factors
• Interest rates, housing, employment

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Business Analysis

• Ease of Entry
• Typically high barriers of entry, but can vary
  across industries
• Strength of customers
• High
• Strength of suppliers
• Relatively low
• Competition
• High
• Substitution
• High

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Consumer Discretionary and Disposable Income (5
yrs)

• High correlation with
• disposable income
• Sharp increase in 2003,
• relatively flat until 2006

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Disposable Income and Unemployment (10 yrs)

• Employment will have
• significant effects on
• disposable income growth

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Disposable Income and Interest Rates (10 yrs)

• Do interest rates affect
• disposable income?
• Interest rates drive
• changes in disposable
• income because higher
• interest rates lead to higher
• costs to consumers
• (i.e., financing costs)

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Consumer Discretionary and Interest Rates (10 yrs)

• Do interest rates affect
• consumer discretionary
• sector?
• No statistically
• significant correlation,
• potentially due to a lag

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Existing Home Sales and Housing Starts (10 yrs)

• Sub-sectors of
• consumer discretionary
• suffer when home sales
• decline
• (i.e., Home improvement
• retailers)

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Financial Analysis

• Consumer Discretionary price index are on a
  positive trend.

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Financial Analysis

• Consumer Discretionary price index relative to
  SP 500 price index are at the average level.

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Financial Analysis
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Financial Analysis
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Financial Analysis

• Low growth rate estimates

• EPS for the sector has been
• on a positive trend, but slowed
• down at the end of 2006

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Financial Analysis

• Increasing gross margin
• Op. margin net margin have remained relatively
  steady

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Financial Analysis

• For the last three years, CF has been decreasing
  due to investing and
• financing activities
• Sector is a net user of cash

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Financial Analysis

• Pretax margin and net profit
• margin are contracting
• compared to SP 500.

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Multiple Valuation 5 -yr

• Relative to SP 500
• P/Forward E High
• Trending down
• P/EBITDA High
• Stable
• P/S High
• Trending Down

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Multiple Valuation 5 -yr

• P/CF Very High
• Trending down

• P/B Very High
• Trending down

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Multiple Valuation 10 -yr

• Relative to SP 500
• P/Forward E High
• Trending down
• P/EBITDA High
• Trending Down
• P/S High
• Trending Down

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Multiple Valuation 10 -yr

• P/CF High
• Trending down

• P/B High
• Trending down

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Current SIM Holdings
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Sector Recommendations
Recommendation Hold the Underweight Position
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Questions?